2016 April

2016 April Exam

2016 April Examiners’ Report

Question 1

Q1.i

Reasons to build an internal model for ERM

  • Module 30 Section “Internal Capital Models”

  • Module 21 Section “Model Development”

Q1.ii

Pros and cons of using standard formula vs internal model for SII

  • Module 30 Section “Internal vs Generic Models”

  • Key to focus is on the small size and niche risk of the company

  • Make sure to discuss both sides

Q1.iii

Selection of models between 3 options

Some key points:

  • Model 1:

    • Runtime okay

    • Less human error

    • Some approximation

    • Appropriate matching assets might be hard to find

  • Model 2:

    • Least approximation

    • Hard to calibrate (due to high number of real world scenarios needed)

    • Long run time

    • Too complex hard to test

  • Model 3:

    • Greatest level of simplification

Q1.iv

Additional information on the software to request

  • A bunch of stuff easy

Question 2

Q2.i

Propose practical cost effective ERM activities

  • Make sure we’re not just proposing mitigation activities

  • Key is on the early steps of the ERM process and more focus on the governance

    • Identify

    • Risk register

    • Risk appetite and tolerance statement

    • RMC and have meetings and risk reports

    • Appoint risk manager

  • Module 13 Section “Risk Identification and Assessment Process”

  • Module 9 Section “Risk Management Policy”

    • Risk appetite, risk tolerance, risk limits

  • Module 10 Section “Risk Reporting”

    • Not as much from here, mostly just report

Q2.ii

How bank would evaluate the credit risk of the company

  • Should be mostly from Module 23 and 28

    • Module 28 Section: Credit Granting, Underwriting, Due Diligence

  • List out the assumptions, how to access probability of default and loss given default

  • Key is to have a wide range of ideas

  • PD

    • Assess this for key possible reasons for default

    • 1 reason would be due to non payment

    • Another reason could be macro driven (e.g. property value < loan principal)

  • LGD

    • Walk through what the LGD would be

Q2.iii

Improvement on corporate governance

  • Module 4, 11, 12 (maybe 8 and 9)

  • Some key themes

    • BoD structure

      • NEDs and its benefits

    • Incentivise the BoD

    • Expand shareholders

    • Board committees

    • Audit structure

Q2.iv

Risk identification tools

  • Module 3

    • Section “Risk Identification Tools”

Q2.v

10 potential op risk

  • List a bunch of op risk…

Q2.vi

Whether holding additiona capital is a suitable risk mitigation technique for op-risk

  • Modeul 29 (maybe 24)

Q2.vii

Alternative mitigation techniques for the op-risk in v

  • Modeul 29 (maybe 24)

Q2.viii

Modeling for flood risk

  • EVT

Q2.ix

Information needed for modeling flood risk

  • Module 20, 15

  • Amount of data, for freq and sev

  • Repair cost and expert judgement (for trends and changes)

Q2.x

Overall corporate risk exposure and importance of each risk after allowing for the impact of likely mitigation strategies

  • Module 13

  • Use Categorization technique to rank the risk

  • State what are the objectives used to judge the risk

  • Define what high risk is

  • Categories of risk:

    • Operational

    list out the rating for freq and sev and any mitigations

    • Financial

    • Customer demand

    • Other

  • Other considerations

    • Correlations

    • Company’s mitigation process

  • Conclusions

Question 3

Q3.i

Ways to reduce financial market risk exposure without risk transfer

  • Module 26, 27, 28

  • Avoidance

  • Diversification

  • ALM

  • Internal control

Q3.ii

ALM risk

  • Module 22, 27

Q3.iii

Cashflow matching

  • Module 22, 27

2015 October

2015 Exam and Examiners’ Report

Question 1

Reasons to have a global ethics officer

  • Reduce, op-risk, reputational risk (examples)

  • Improve future growth

Question 2

Q2.i

ORSA and SII

  • Quantitative, qualitative, dislosure

  • ORSA: identify all risk, RM processes and controls and quntify ongoing ability to continue to meet its MCR and SCR

Q2.ii

Advantages of a standardized ORSA for local offices

Q2.iii

Challenge for pushing out standard risk report

Q2.iv

Scenario testing for local office based on local standard

  • List both for and against

Quesiton 3

Q3.i

Features of GEV

  • Definition, location, scale and shape

Q3.ii

Fitting a GEV

  • See Module 20

Q3.iii

Appropriateness of the GEV

  • GEV assumes iid observations (not true, volatility cluster, different distribution due to different underlying mix)

  • Lack of data

Question 4

Q4.i

Risk associated with investing in the securitized bonds from solar

  • Main risk is credit/counterparty risk (also discuss mitigation )

  • Lower than expected revenue

    • What might impact the revenue

    • diversification of panels

  • Legal risk

  • Impact to the capital required

  • Op-risk from lack of expertise

  • Consider the limited time to make a decision and also losing first mover advantage

  • Basis risk from the inflation linked

  • ALM

Q4.ii

Suitability of asset based on the liability

  • Duration

  • Inflation sensitivity

  • Currency

Q4.iii

How to set up stress test for 2 of the more material risk

  • Collection of data and from where (suppliment form expert opinion if needed)

  • Project historical trends and fit distribution

  • How to se capital charge

Question 5

Q5.i

Put option, spread, futures payoff and graph

Q5.ii

Pros and cons of each

  • Future

    • Can fully hedge minus basis risk (best in an economic basis)

    • May introduce volatility due to the way Basis 1 is measured

    • Admissablity as well as hedging off balance sheet risk

    • Making margin call

  • Put/spreads

    • Talk about the cost

  • Other considerations

    • Exchange traded or not

Q5.iii

Justify the spread formula

Q5.iv

Plug an play on the put spread formula

Q5.v

Assess alternative scenarios under Basis 2

  • look at the change in put spread price

Q5.vi

Impact of purchasing the put spread under Basis 1

Q5.vii

Stress (sensitivity) test

Q5.viii

Purchase or not

  • Assess cost of captial

  • Look at capital impact

  • Internal expertise on handling derivatives

  • Counterparty risk

2015 April

2015 Exam and Examiners’ Report

Question 1

Q1.i

Assess the fitted t distribution

  • Module 15, 16, 19

  • Discuss data set size, applicability for future (regime shift)

  • Shapes of the empirical

  • Fitted vs empirical

  • Data excludes dividend income

Q1.ii

Propose further analysis or adjustments

  • Remove dependencies and overlap

  • Longer period of data

Q1.iii

Assess the stress scenario picked

  • See how it stacks with a normal distribution with the observed s.d.

  • diversification (not bad at the same time)

  • Comprae the series

Q1.iv

Discuss features on spread and how it should behave

Q1.v

Suggest possible extensions to the analysis

  • Other consideration that impact the spread

  • Split by industry, include other countries

Q1.vi

Model future risk free bond yields using PCA

  • Module 22 and 16 (Maybe 19)

  • Straight from the notes

  • Module 22 talks about how to fit the data

  • Modeul 16 talks about how to simulate with PCA

Q1.vii

How many PC are likely to be used

  • 3: parallel shift, slope, yield curve to bend

Q1.viii

Currency movement impact on solvency ratio and how to hedge

  • Explain why it would impact the ratio

  • Propose how to hedge with forward

Q1.ix

Disadvantage of the above viii

  • Ignores dependencies between risks

Q1.x

Propose alternative objectives for the currency risk hedging

  • Intead of a fix 200%

  • Introduce probabilitys

Q1.xi

Why hold captial for currency risk

  • Not accounting for interdependences, regulatory requirement, counterparty risk, other assets

Q1.xii

How ERM will help with sovereign deft crisis before, during and after the crisis

  • List out ERM benefits first

    • On risk identification, quantification, limits

    • Crisis plan

  • Before crisis

    • Plan and prepare

  • During

    • Reporting, operational effectiveness

    • Profit off the crisis, minimize impact

  • After

    • Lessons learned, market confidence, contagion

Q1.xiii

Buying CBI insurance, risk that could arise during sovereign debt crisis (and how hard it is to quantify)

  • lapse risk, new business volume, op-risk

Question 2

Q2.i

Evaluate the risk culture

Q2.ii

Identify and analyse emerging risk

  • horizon scanning

  • holistic view

Q2.iii

Implications on diminishing natural resources

  • On asset, liabilities and deficit

Q2.iv

Actions to take on the above

  • Invest in energy and commodity

Question 3

Q3.i

How to hedge the guarantee using HPI floors

Q3.ii

Describe the weakness of the hedge

  • Basis risk (actual outperforming or underperformaing the HPI)

  • High cost

  • Liquidity, credit risks

Q3.iii

Using RPI instead of HPI

  • Assess the basis risk

  • Should remove trend before accessing correlation

  • Time period chosen

  • Difference in the cumulative increase

Q3.iv

Additional analysis

2014 Sep

2014 Exam and Examiners’ Report

Question 1

Pros and cons of having joint or seperate actuarial and risk fucntion

  • See Module 12 Section “Risk Management Function”

  • Seperate is mostly key ERM talking points

  • Together is mostly based on cost savings, more integrated, quicker, less duplication

Question 2

Q2.i

Person’s \(\rho\)

Q2.ii

Kendall’s \(\tau\)

Q2.iii

Merits of the 2 sets of data

Q2.iv

Suggest insurance class for the data

  • Consider the correlations

Question 3

Q3.i

Define op risk

  • Risk of losses resulting from inadequate or failed internal processes, people and systems or from external events

Q3.ii

How a life company can measure op risk

  • Measure as the impact of op-risk events on one or more on stuff such as: cost of stagging, fines, turnover, reduced customer satisfaction, impact on surplus

  • Get data or expert to consider freq and sev

  • Scenario analysis, correlations

Q3.iii

Interview approach pros and cons

Q3.iv

Need for disaster recovery

  • Discuss the impact and then importance

Q3.v

Including diaster risk in op-risk

  • Raise profile on diaster risk

  • Might be difficult to find data and calibrate

Q3.vi

Risk appetite statement and examples

Q3.vii

What accounting basis should the risk appetite statement be based on

  • Go through the whole logic and discuss all the pros and cons

Q3.viii

Disadvantage of basing risk appetite only on profit

  • Short termism

  • mis-selling risk

  • Can create solvency issues

  • Just not necessarily align with what’s best for shareholders

Question 4

Q4.i

Risk faced by ERMI (a ERM professional qualification)

  • Business risk, strategic risk, reputational risk for APB

Q4.ii

How to mitigate some of the above risk

Q4.iii

Outline a bunch of processes

Question 5

Q5.i

Components of mortality risk

Q5.ii

Process of GLM modeling for mortality risk

Q5.iii

Why rate will be different from model

  • Market driven

Q5.iv

RM rationale for the loss leader strategy

  • diversification

Q5.v

KRI or KPI to monitor this strategy

Q5.vi

Compare the likely life insurance risk exposure between the 2 companies

Q5.vii

Contrast the 3rd company’s life insurance risk exposure to the other 2

Q5.viii

Why internal model might benefit the 3rd company

  • Size, niche, data limitations

Question 6

Q6.i

Minimum regulatory capital requirement

  • Long ass questions to calculate all the risk

Q6.ii

Reasons to hold more than the minimum

  • See the list quite good

Q6.iii

Investigation into the high market premium

  • Reasons for high claims (maybe only from certain firm)

  • Systemic loss

2010

2010 Exam and Examiners’ Report

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6